There’s nothing worse than trying to save a deposit, then the real estate market goes nuts, with prices soaring and there’s nothing you can do about it but watch it happen around you… You’ve no doubt researched all your options, desperate to find a solution and are starting to get concerned. There’s a lot of articles out there that claim to have the answers, but don’t actually tell you much at all.
Not Blackbox Finance! We are big believers in educating you and giving you all of the facts to help you make an informed decision, so here goes, here’s everything you needed to know and then some!
INTRODUCING A GUARANTOR:
We have this conversation a lot with clients, because what a loan guarantor used to has changed significantly in recent years. In years gone by, you could introduce what is known as a “servicing guarantor”. This basically said to the bank “if we can’t pay the mortgage, our guarantor will help us”. This no longer exists.
In banking today, the guarantor is known as a “security guarantor”. Their role is, when you are seeking to buy a property and have less than a 20% deposit, you can introduce a guarantor (mostly limited to family members) who can offer up a portion of their property as security for the loan. In doing this, the bank will then consider your application like you have a 20% deposit, which assists you in reducing your entry costs by eliminating the need for lenders mortgage insurance (LMI). This still an option worthwhile considering, because the savings can often account for around 30% of the funds you would otherwise need to save yourself.
We understand that this can often be a difficult or uncomfortable conversation to have, but rest assured, people all over Australia have this conversation with their parents every day. If asking parents, it’s no doubt something they have already considered or spoken about anyway, so it’s not like it will come out of left field for them. The simple motivator here is “If you don’t ask, you don’t get”.
MINIMUM DEPOSIT OR HIGH LVR HOME LOANS:
LVR = “Loan to value ratio” simply means, how much is the home worth Vs how much are you borrowing, then this is expressed as a percentage.
As a rule, most Australian banks only want to lend you up to 95% for the purchase, requiring you to have a minimum of a 5% deposit. Of the 40+ banks that we have access to, there are currently only 3 x banks willing to exceed this (Bankwest, Liberty & Heritage). Most of these will lend up to 98% with Heritage the exception, who will lend up to 100% (conditions apply).
These loans are still structured like a standard home loan, it’s just that the bank is prepared to lend you a little extra to cover some of your entry costs. As an example, on a 98% loan, the bank is still only lending you 95% for the ACTUAL PURCHASE, then the extra 3% allows you to capitalize the cost of lender’s mortgage insurance (LMI) into the loan, rather than from your own savings/deposit.
When considering these loans, you also need to consider, the higher the percentage a bank is prepared to lend you, the more of a “risk” you become to that bank. So, you can expect them to go through your application with a fine-toothed comb, interest rates will most likely be higher than market standard (typically 1.0 to 1.50% higher), and you may find the types of loan, interest rate or loan features you would like are restricted on these types of loans.
Also, when applying for a loan of this type, or any loan where LMI is involved, it requires not only the bank to approve the loan, but they then send it off to the LMI provider (typically Genworth or QBE) as they have to approve the loan also. If you are seeking a loan of this kind, we highly recommend you get in contact with us. Not all banks are created equal, each of them will pick and choose the types of applicants/loans they like, and that is where we do our best work!
BORROWING ADDITIONAL FUNDS TO HELP YOU BOOST YOUR DEPOSIT:
This option used to be common, but not so much now these days as banks have cottoned onto this going on and most have changed their lending policy to exclude the use of borrowed funds for your deposit. There’s now only a handful of banks that will allow you to do this. If I were looking for one, I would start with the big 4 banks, then failing that, start to search “specialist home loans”.
How it works is very simple, you apply for a personal loan or credit card (PL & CC) for the shortfall of funds. Why banks have cracked down on this is because it introduces another debt into the household, often the personal loan has a large monthly repayment attached and the concern is you will struggle to pay the PL & the mortgage.
We DO NOT recommend this option to our clients, particularly using a credit card. It’s asking for trouble, it doesn’t take much for something major to occur within your family life, to find yourself under significant financial stress and with limited/costly options to get you out of that situation.
PARENTS, FRIENDS OR FAMILY WHO CAN HELP WITH SOME EXTRA $$$:
This is a great option and often your family want to help where they can. Most banks are happy to consider gifted funds, most will want to see that you have either saved some of your own as well or proof that you have been paying rent without issue. You can receive funds to use as part of your entry costs in 2 x different ways:
- A NON-REPAYABLE Gift – Quite simple, where your family member just gives you cash to use. The bank will want you to get a statutory declaration witnessed by a JP to state that the family member DID actually gift you the funds, and also needs to state that it’s a NON-REPAYABLE GIFT.
- A REPAYABLE Gift – This is where you come to an arrangement to repay the family member gifting you the funds. In this situation, you need to factor in the repayment to the family member into your loan servicing/current debts, you will also need a statutory declaration witnessed by a JP stating the family member gifted you the funds and the agreed repayment amount.
There are several banks that have been watching the change occur in the guarantor loan space and have reacted to market demand and developed products that can assist achieving the same result, here is just a one example:
- La Trobe – The most common response from parents that are asked to assist their kids with cash is “what if you guys get a divorce, the money we have contributed is lost and our child no longer has any benefit from that money”. They may not say this directly, but my experience is this is the standout reason more guarantor loans do not go ahead.
La Trobe developed a product called the “P2C” loan. Without going into too much detail here, this loan aims to:
a. Ensure the parents money will be returned to them if everything goes pear shaped.
b. Reduces the entry costs for the applicants by eliminating the need for LMI.
c. Increases your equity stake in the property.
d. Parents will receive a financial return on the money they have assisted you with.
So, there is 4 x alternatives right there and we’ve only just scratched the surface! It’s also worth noting, with some of these options, you don’t necessarily have to be a first home buyer.
WE STRONGLY RECOMMEND THAT YOU CONSULT WITH US BEFORE ATTEMPTING TO APPLY FOR ANY OF THESE LOANS. There are many things to consider when putting together a loan application and any one of those factors can impact the success of your application. Our Blackbox brokers have extensive experience finding solutions to any of your lending challenges. Give us a call today and let us find you your solution!